Is Germany's Economic Upturn a Genuine Recovery?
- Progress on Structural Adjustments and Issues for the Future -
June 23, 2006
Germany continues to enjoy a gentle economic recovery, with real GDP growth rate of +1.4% year-on-year in the 1st quarter of 2006. One feature of the current recovery phase is that the corporate sector is more vigorous than it has been in many years. The household sector, by contrast, remains sluggish.
The reason for Germany's prolonged economic stagnation is that the country has historically placed great importance on social welfare, and, over the years has built up a "generous welfare state system". The generous welfare systems applied to households have obstructed adaptation to globalization, birthrate decline and population aging, increasing use of information technology and other environmental changes, and, since the 1990s, Germany has been suffering from the problem of "high cost structures". The European monetary union, implemented in 1999, aggravated the economic stagnation resulting from this high cost structure. The reunification of East and West Germany may also have played a part in Germany's economic stagnation.
In recent years, however, there have been signs of change in relation to these problems. As a range of legislation based on "Agenda 2010", a bill calling for a comprehensive program of structural reform including labor market, tax and social security reform, has come into force, initiatives aimed at correcting the "high cost structures" have begun to make progress. Recent years have also brought signs that the problem of the fusion of East and West Germany is heading towards resolution.
It is, thus, reasonable to conclude that the various problems that have caused Germany's long economic stagnation are gradually heading towards resolution, and that the economy is entering a phase in which it will escape that prolonged stagnation. However, it is also true that the process is not yet completed, and it is likely to be some time yet before the household sector recovers and the German economy is fully regenerated.
Moreover, there are fears that European monetary union will be a new burden on economic growth. It is feared that the decline in the degree of freedom of monetary and fiscal policy will prevent the government from introducing agile economic stimulatory measures when they are required, and that this may lead to a destabilization of the economic trend.
If the economy is, literally, to be resurrected, Germany must speed up the reform of its "generous welfare state system" and fortify its economic constitution by honing its competitive strengths, so that the creation of a single European market contributes to the growth and development of the German economy in accordance with the principle of comparative advantage.
・Germany Enjoys Steady Economic Recovery Driven by the Corporate Sector
・Factors That Have Honed the Growth Potential of the German Economy
・Moves to Resolve Structural Problems
・Fortifying Germany's Economic Constitution a New Issue for the Future
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